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Community Reinvestment Act Final Rule: Will the FDIC Eventually Adopt the New Regulations

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Community Reinvestment Act Final Rule: Will the FDIC Eventually Adopt the New Regulations NORTH CAROLINA BANKING INSTITUTE Volume 25 Issue 1 Article 14 3-1-2021 Community Reinvestment Act Final Rule: Will the FDIC Eventually Adopt the New Regulations Kevin Goldman Follow this and additional works at: https://scholarship.law.unc.edu/ncbi Part of the Law Commons Recommended Citation Kevin Goldman, Community Reinvestment Act Final Rule: Will the FDIC Eventually Adopt the New Regulations, 25 N.C. BANKING INST. 401 (2020). Available at: https://scholarship.law.unc.edu/ncbi/vol25/iss1/14 This Note is brought to you for free and open access by Carolina Law Scholarship Repository. It has been accepted for inclusion in North Carolina Banking Institute by an authorized editor of Carolina Law Scholarship Repository. For more information, please contact [email protected]. Community Reinvestment Act Final Rule: Will the FDIC Eventually Adopt the New Regulations? I. INTRODUCTION In 1977, Congress stated that banks have continuing and affirmative obligations to help meet the credit needs of local communities, especially low-and moderate-income (“LMI”) neighborhoods where they are chartered, in a manner consistent with the safe and sound operations of the institutions.1 Congress came to this idea based on previous chartering laws requiring banks to demonstrate that their facilities serve the convenience and needs of their community, LMI neighborhoods, and credit and deposit services.2 The Community Reinvestment Act (“CRA”) was enacted in an attempt to ensure that insured depository institutions satisfy their obligations to meet the credit needs of their entire community; specifically LMI neighborhoods.3 The CRA requires the Office of the Comptroller of the Currency (“OCC”), the Federal Deposit Insurance Corporation (“FDIC”), and the Federal Reserve Board of Governors (“FRB”) to use periodic “performance evaluations” to assess the performance of depository institutions in fulfilling these obligations.4 The OCC oversees nationally chartered banks and federal savings associations, the FRB oversees state chartered banks that are members of the Federal Reserve System (“FRS”), and the FDIC oversees insured state banks that are not members of the FRS.5 1. See e.g., BD. OF GOVERNORS OF THE FED. RESERVE Sys., History of the CRA (Dec. 7, 2018), https://www.federalreserve.gov/consumerscommunities/cra_history.htm [https://perma.cc/6FBY-HZYF] [hereinafter FED. RES.]; Community Reinvestment Act, 12 U.S.C. § 2901 (2012) (describing all the changes made to help the credit needs of LMI neighborhoods); Community Reinvestment Act Regulations, 85 Fed. Reg. 34734, 34758 (June 5, 2020) (to be codified at 12 C.F.R. pt. 25 and 195) (explaining banks’ continuing and affirmative obligations to LMI neighborhoods). 2. Id. 3. See 12 U.S.C. § 2901 (mandating financial institutions to “help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions”). 4. Community Reinvestment Act: Background & Purpose, FED. FIN. INST. EXAMINATION COUNSEL (Sept. 6, 2018, 5:52 PM), https://www.ffiec.gov/cra/history.htm [https://perma.cc/25C4-FMTV]. 5. Id. 402 NORTH CAROLINA BANKING INSTITUTE [Vol. 25 In October of 2020, the OCC adopted a final rule that modified how regulators rate banks on their community reinvestment efforts.6 This rule created a more objective and transparent standard for evaluating a bank’s community reinvestment performance.7 In addition to providing a more objective standard, the rule encourages banks to invest, lend, and provide more loans to their respective communities and LMI neighborhoods.8 Beginning in 2021, the CRA will proscribe that 80% of banks will be subject to the FDIC and FRB regulatory regime, while the other 20% will be subject to the OCC regulatory regime.9 The FDIC originally signaled its agreement with the OCC’s December 2019 Notice of Proposed Rulemaking by engaging in a joint-rulemaking session with its fellow agency.10 The FDIC has since stated at the end of 2020 that it should not go through with the rulemaking during the COVID-19 pandemic.11 Since, in the end, only the OCC adopted the new rule, but not the FDIC or FRB, only nationally chartered banks must adhere to this rule.12 This could lead to opportunities for regulatory arbitrage, since state chartered banks do not have to adhere to this rule.13 The OCC’s new rule, effective October 1, 2020 sounds promising on its face, but does it actually achieve the goals that it desires?14 In some ways it certainly does; the rule increases credit for mortgage origination in an attempt to increase the availability of affordable mortgages in LMI areas, and it increases support for small businesses, as well as small and 6. See generally Community Reinvestment Act Regulations, 85 Fed. Reg. 34734 (June 5, 2020) (to be codified at 12 C.F.R. pt. 25 and 195) (explaining all of the provisions of the final rule). 7. Joseph Otting, The Final CRA Rule Is In. Here’s Why It’s Better, AM. BANKER (May 20, 2020, 8:02 AM), https://www.americanbanker.com/opinion/the-final-cra-rule-is-in-heres- why-its-better [https://perma.cc/7C5D-NAMF]. 8. Id. 9. Community Reinvestment Act Regulations, 85 Fed. Reg. at 34739. 10. Community Reinvestment Act Regulations, 85 Fed. Reg. 1204 (proposed Jan. 9, 2020) (to be codified at 12 C.F.R. pt. 345). 11. Id. 12. Laurie Goodman et al., The OCC’s Final CRA Rule Improves Upon the Proposed Rule but Remains Unsatisfactory, URBAN INST. (July 2020), https://www.urban.org/sites/default/files/publication/102515/the-occs-final-cra-rule- improves-upon-the-proposed-rule-but-remains-unsatisfactory_0.pdf [https://perma.cc/EAP6- BHFL]. 13. Id. 14. See generally Scott Coleman et al., The OCC’s Final CRA Rule: What Changed from the Agency’s Proposed Rule?, JD SUPRA (June 15, 2020), https://www.jdsupra.com/legalnews/the-occ-s-final-cra-rule-what-changed-62599/ [https://perma.cc/E4UU-E8JV] (outlining major changes from the CRA and explaining in detail what they attempt to accomplish). 2021] COMMUNITY REINVESTMENT ACT 403 family-owned farms.15 However, in some ways it came up short—there was no evidence of the proposed rule’s impact on LMI areas and there is still uncertainty as to how effective the new final rule will be in assessing banks.16 This Note addresses whether the OCC’s final rule actually accomplishes the goals it desires and whether the FDIC will eventually adopt this new policy. Part II explains the history and development of the CRA and how banks have been evaluated under it in the past.17 Part III examines whether the final rule accomplishes the goals it desires by weighing the support of the final rule against the critiques.18 Part IV concludes by discussing whether the FDIC will eventually adopt these new regulations.19 II. CRA HISTORY AND DEVELOPMENT Congress passed the CRA in 1977 to require the OCC, FRB, and FDIC to examine financial institutions and encourage them to help meet the credit needs of the local communities in which they are chartered, as well as LMI neighborhoods.20 Since its passage in 1977, the CRA has been periodically updated in order to provide more objective standards and resolve financial and economic issues during the relevant time period.21 In 1989, the CRA was modified to require regulators to provide more detailed written evaluations, publicly disclose CRA results, and establish a tiered rating system.22 In 1991, the FDIC Improvement Act (“FDICIA”) strengthened the role of the FDIC by giving it an increased role in overseeing banks 15. See generally Otting, supra note 7 (explaining how an increase in credit for mortgage origination positively affects LMI households). 16. Goodman, supra note 12. 17. See infra Part II. 18. See infra Part III. 19. See infra Part IV. 20. Community Reinvestment Act, 12 U.S.C. § 2901(b) (2012); see also 12 U.S.C. § 2903(a)(2) (2012) (explaining the examination process when evaluating a bank’s CRA performance). 21. FED. RES., supra note 1. 22. The CRA temporarily created the Resolution Trust Corp. in an attempt to help the nation's failed savings and loan institutions. In addition, the CRA abolished the Federal Savings and Loan Insurance Corporation, as well as created the Savings Association Insurance Fund and the Bank Insurance Fund. Regulations were also finalized to make sure that real estate appraisals are performed to a certain standard, including requirements for adequate training of appraisers and of their supervisors. See 12 U.S.C. § 2906 (2012) (describing all other changes that were made to the CRA at this time). 404 NORTH CAROLINA BANKING INSTITUTE [Vol. 25 and protecting consumers.23 Congress enacted the FDICIA as a response to the Savings and Loan Crisis—an event that caused the failure of nearly a third of the U.S. savings and loan associations by 1995.24 The FDICIA created the Truth in Savings Act, which requires banks to provide disclosures regarding savings account interest rates, allowing consumers the ability to compare products offered by different banks so that they have more information.25 The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 requires separate CRA performance assessments in every state where a bank has an actual physical presence.26 It also requires an agency to evaluate an out-of-state national bank's CRA rating or a state bank's CRA rating when deciding whether to allow banks to build interstate branches.27 In 1995, the CRA regulations were updated in an attempt to account for an institution’s size and business operations.28 The updates in 1995 instituted three “performance tests.”29 First, the Lending Test, which is the most heavily weighted in terms of a bank’s CRA rating, rates institutions on the number, amount, and distribution of loans across different geographic neighborhoods and income groups.30 Second, the 23.
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